Clive Betts, Labour MP for Sheffield South East and widely respected chair of the Communities Select Committee, told MPs during the debate on the Leasehold and Freehold Reform Bill that the government could remove onerous ground rents from existing leases without breaching the European Court of Human Rights rules.
He did so in reference to the government now consulting on removing ground rents from existing leases, which all leaseholders should respond to, with a deadline of 17 January 2023.
This will be a subject addressed by the next meeting of the All-Party Parliamentary Group on leasehold reform on January 15, with expert legal opinion:
He said: “Returning to onerous ground rents, the Select Committee took counsel’s opinion, which was quite interesting, and made recommendations in paragraphs 114 to 116 of our report [Published in March 2019].
https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/1468/full-report.html#heading-7
“There were two clear arguments why removing onerous ground rents from leases retrospectively was completely compatible with the European convention on human rights. The first, which most of us may not have thought about, is that controlling or changing rent is not confiscation of property but control of its use, so it does not conflict with the article on removing people’s property rights.
“Secondly, the convention includes a justification where the proposal has a wider beneficial impact on society, which can be offset against any impact on the property owner. Counsel’s opinion was that it was therefore perfectly justifiable under the European convention to remove onerous ground rents on existing properties.”
Unfortunately for leaseholders, the Select Committee also reported counsel’s view, p116, that “Freeholders would probably need to be compensated in order to ensure the legislation is compliant with human rights law. But that compensation need not necessarily be full value. The Government should undertake a comprehensive study of existing rents to determine the scale of the problem of onerous ground rents and the level of compensation which would be consistent with human rights law.”
Mr Betts made a number of detailed points about the Leasehold and Freehold Reform Bill on Monday.
First, he wanted the right of first refusal for leaseholders to apply whenever any freehold is sold.
He named Coppen Estates, active around South Yorkshire, as one of the more egregious freehold investors who “will not comply with any legislation, or will try to avoid it, do not reply to letters”.
LKP comment: It is astonishing that a public servant of the calibre of Clive Betts is being brushed off by some leasehold sector bottom-feeders like the Pennington family who own Coppen Estates. They should be far more famous. LKP reported a previous scandal below:
He wanted “a programme of education and information for leaseholders, to ensure a better understanding of what commonhold is all about”.
He urged right to manage to be strengthened “both for leaseholders and for freeholders [ie “fleecehold”] in these estates who own the freehold of their house but not of the communal areas.
“In all property purchases where common areas remain in private ownership, there should be, at the point of purchase, a clear understanding of the agreement between the local authority and the developer about who is responsible for those common areas. In many circumstances it is simply opaque. Often, purchasers do not know who is responsible and are sent on a wild goose chase to find out once they have bought their property.”
Mr Betts urged the government to include reforming forfeiture in the Bill.
“If leasehold is a feudal tenure, then forfeiture is prehistoric — it really is. If a leaseholder in a very small way fails to comply with an element of their lease, they could have the property taken off them. That is just unacceptable and unjustifiable.”
Mr Betts also asked why do freeholders not have to join a redress scheme? “The Committee called for them to be included in the redress schemes. The Secretary of State is bringing in a number of redress schemes and ombudsmen extensions, so why can freeholders not be included?”
He urged service charges to be formally protected in law: “Currently, many leaseholders have no idea what the money is being spent on. There is no obligation on the freeholder to explain it and certainly no protection that funds have to be used for the purpose for which they are paid.”
He also pointed out that his select committee has repeatedly called for a housing court, which is opposed by the government, “but I think we ought to keep asking. There are so many issues in the housing field that need a specialism, and need quick decisions and quick resolution. A housing court would be one way of doing that and of trying to improve the process”.
Finally, Mr Betts urged that developers and estate agents recommending conveyancing solicitors needs to be stopped:
“The solicitors were compliant in that [the ground rent scandal], because they had been recommended by the developer. Often, a bonus was thrown in: “We’ll give you new carpets in the living room if you use that solicitor.”
“The Competition and Markets Authority investigated at our request and said there was mis-selling, but so far nothing has been done about it … Can we not see something on that again?
“I do not think that there is any great conflict across the House, or between anyone who has been involved in this matter. It is wrong—absolutely wrong. Solicitors should not be induced in this way to provide conveyancing to a purchaser, when the developer is recommending that solicitor. It simply is not right and it needs addressing.”
And
https://www.parliamentlive.tv/Event/Index/049c012d-0c14-4997-bfcb-c4c1a1c1ac69
Related posts:
Don’t trust developers to put right the wrongs that they created, Clive Betts tells government
CMA’s devastating report on leasehold mis-selling echoes the Communities Select Committee, says Clive Betts MP
Government told to curb excessive ground rents and ‘disassociate’ from freeholders’ ‘Pledge to Leaseholders’ by Communities Select Committee
Political arms race commences as Labour announces £250 ground rents for existing leaseholders
Leaseholders urge Clive Betts MP to quiz housebuilders over ground rent review schemes
Is Gove an empty vessel making the loudest noise? asks Samantha Dixon. And where is Lord Best’s report on regulating property managers?
I take it you guys haven’t read 116 of Clive’s own select committee report which states that compensation will have to be paid? He conveniently omitted that paragraph from his parliamentary speech,
We have, in fact. But it was not mentioned by Clive in the debate. We linked to the Select Committee report directly below the paras indicated, And Tweeted the below.
We have an APPG on Jan 15, where leading authorities on property and the ECHR will discuss precisely this.
Weirdly he also l didn’t refer to the legal opinion received by Heather Wheeler which was discussed at Clive’s committee and confirmed it would be “horrendously expensive” to cap the ground rent in existing contracts.
An onerous ground rent is a rent that impacts the value of a leasehold property. If, however, before the purchaser enters into the lease/contract the premium paid reflects the ground rent terms, then in those circumstances, that onerous ground rent loses its label and is a fair rent. I think there is a broad acceptance that the ground rent should be left alone in those circumstances.
Another way to look at it is that an onerous ground rent is a flag to alert the purchaser to consider the premium and the rent with particular care.
Where the price paid does not reflect the rent burden, then whose is to blame? The freeholder would argue that the deal was laid out in advance of the purchase, and the buyer has a surveyor and solicitor look over the deal. The agreement reached must imply that at the date of entering the contract, the proposed rent and premium created a fair deal; otherwise, the contract would not have been signed. Then, if it is not the freeholder, it must be the professional advisors acting for the purchaser or the government for not bringing ground rent terms within the scope of the Consumer Credit Act. If it had fallen within the scope of the Act, then there would have been a requirement to show the extent of the financial liability the purchaser was entering into. So, the purchaser would have seen if the premium plus the value of the ground rent made for an acceptable deal.
However, ground rent is not within the scope of the Consumer Credit Act, and there are leaseholders with problem ground rents that need to be addressed.
An important distinction must be made between onerous rents and pernicious rents. Pernicious rents are nasty – they appear to be benign. Still, when examined later on, the cost of removal can be staggering. There is an element of entrapment, and these rents need legislative action to remove them. They have the characteristics of rising by more than inflation and become progressively more burdensome over time.
To remedy the problem of pernicious rents, the doubling clause, or whatever the review terms are, should be changed so that on the review date set out in the lease, the rent rises by what was planned for in the lease or, if lower, the movement in the RPI – in that way the rent never in real terms gets bigger from when it was agreed.
An onerous rent should not be touched because the proposed starting rent must have been plateable for the deal to proceed. If its review clause seeks only to keep its value in real terms the same, that to is not unreasonable
In that way, our principles of contract law remain untouched, and at the same time, the frightening possibility of a ground rent becoming unmanageable is removed.
There is a somewhat naive argument that the freeholder gets the correct price for the property and that the ground rent is the “second bite of the cherry” or pure bunce. Therefore making too much profit on the deal. Our contract law does not allow a purchaser to retrospectively pick apart a deal arbitrarily set an acceptable profit, and then seek a refund of any surplus profit. Which is what a capping of a ground rent implies.
Any Law can be enacted, amended or abolished. The question of compensation for the Residential Freeholders Association may well be a matter for the Courts to decide upon. I seriously and genuinely doubt that any claim by that Firm will succeed.
Would the Residential Freeholders Association or any of its many contributors to this site, please justify to me and others why “England and Wales are the only Country’s on Earth that still endure this archaic, feudal form of Serfdom and why it should remain so?”
All responses eagerly awaited including the traditional “smoke and mirrors” response and my absolute favourite “gobble de gook”
You state
may well be a matter for the Courts to decide upon. I seriously and genuinely doubt that any claim by that Firm will succeed.
You appear to speak with such confidence I would be interested to know your reasoning . In particular how you are able to differentiate the current proposal to pay no compensation to the compensation that was paid under the 1967 Act for houses and the 1993 Act in respect of flats, the 1987 Act for Rent Charges and the Scottish Act of 2002 in respect of feu duties
Aside from Mr Gove propping this confiscation of ground rent income from freeholders with no compensation I have not seen any opinion from an informed person to support such a notion. Mr Give is going against the work of his own department
Introduce a tax on ground rent income of 80%, reduce the value of ground rents by 80%. Simples.
If compensation is deemed to be legally due for reducing ground rent to peppercorn, there should be a simple formula of say a single payment of no more than 7 years at the current ground rent.
This could be capped at the original starting amount in the case of onerouse ground rents, especially where miss selling by conflict of interest panel solicitors was involved.
The government’s proposals seek to amend a formula derived at the time of the 1967 Act and 1993 Act. In those two cases there was an important public interest which was to give people a greater feeling of security in their home and taking away the rights of the freeholder to the reversion required a formula to be struck. In the judgment of James and Others V United Kingdom the court dismissed immediately the idea of paying no compensation (page 24 -top).
Like the Commission, the Court observes that under the legal systems of the Contracting States, the taking of property in the public interest without payment of compensation is treated as justifiable only in exceptional circumstances not relevant for present purposes. [Present purposes was in respect of compensation paid under the 1967 Act ]
Therefore, it does suggest so clearly that Michael Gove’s thumping the table and demanding all rents are reduced to a peppercorn with no consideration is insincere particularly as it flies against counsels’ advice and would expose the government to significant challenge under A1P1. It undermines quite spectacularly the work of his department who had been working on the Bill trying to take on board the advice of counsel. The conclusion for such a stance would be that he and his party who support such a stance are playing to the gallery in the last act before the curtain comes down on a government trying to ingratiate themselves with leaseholders prior to the election.
The idea that rents be capitalised at 14.3% ( ie 7 YP) does not give adequate compensation, particularly as the aim of the proposed legislation is to help lower the enfranchisement / lease extension premium to leaseholders who have already been given rights. The public interest is not as great as in the case of the 1967 or 1993 Act. In 95% of cases the rent is less than a £1 a day. Therefore, the less the matter is in the public interest the more the compensation must equate to market value.
Onerous rents are large and were put on the table BEFORE the purchaser entered into the lease/ contract. If the premium for the lease did not reflect the ground rent payable, then it is rather the fault of the purchaser or their professional advisors. Helping a leaseholder who may have paid 2-4% more for the flat than they should some years early is not in the same league as public interest need back in 1967 and 1993 and therefore compensation to the landlord should be very close to the market value the freeholder loses. A freeholder/developer trying to get the best price for their product by having some of it as a premium and the rest by deferred consideration i.e. a ground rent is not evil, it is the free market in operation.
Where the rent terms are pernicious then that is completely different, and they need to be addressed by legislation